Economics

Immigration

Forging ahead and falling behind

PUBLIC discussion of immigration often circles round to the idea that it is bad for low-paid workers. And it rarely spends much time at all on the economic effects of emigration. But new research suggests that both these things need to change.

Using data from the OECD, a club of rich countries, a new paper (older, un-gated version here) examines the economic effect of immigration during the 1990s. Most interestingly, it looks at the effect of immigration on the wages of "less educated natives”—the group thought to be most damaged by new arrivals.

Countries in the OECD have very different immigration rates (the size of the immigrant flow relative to the population). From 1990 to 2000, the United States’ immigration rate was 5.7%. At the other end of the spectrum stood Estonia, with a rate of -16.7%. A negative value means that more people left than arrived:

By 2000, foreign-born residents comprised 7.7% of OECD countries’ populations—and about half of that group was from other OECD countries. In other words, there is a fair amount of within-OECD movement. What is more, in pretty much all OECD countries recent immigrants are more likely to be college graduates than are members of the native population.

The paper shows that immigration has positive effects on the average wages of less educated workers in OECD countries. (These increases tend to be higher than the corresponding figure for college-educated workers.) Here's a sample:

Explaining these results is straightforward. OECD immigrants are more educated than non-migrant natives. And educated people are job-creating. As a result, higher immigration leads to higher job creation—resulting in better wages for people further down the job ladder. Less educated workers in countries that favour more educated immigrants—like Australia and Canada—experience larger wage gains.

There are no prizes for guessing the economic consequences of emigration. For example, in Cyprus, Ireland and New Zealand during the 1990s, less educated workers suffered a wage decline of 3-6% due to emigration of the highly skilled. Fewer skilled workers meant fewer job opportunities.

But highly educated workers reaped the benefits of emigration. With fewer educated workers, there was less competition for skilled jobs—leading to higher wages at the top of the income ladder. For small countries with a large brain drain (such as Cyprus or Ireland), the positive effect of 1990s emigration on the wages of the highly educated was 15-20%.

The results suggest that immigration reduces wage differentials between the lowest and highest paid workers—and that emigration does the opposite. Other research suggests there are some offsetting benefits to workers of all skill levels in countries experiencing emigration; high rates of emigration of skilled workers tend to encourage "human capital formation"—or education and training—in the country of origin, for instance. But it seems clear that governments should worry less about new arrivals—and a little more about the plight of less-skilled workers in high-emigration countries—if they are really interested in doing something about income inequality.

There may be an additional (and complementary) explanation why the wages of non-migrant natives further down the job ladder improve with increased immigration: the endophilia of native employers in a job market with immigration, i.e. the favoring of one's own people, as described in the following paper:www.nber.org/papers/w19471

Such discrimination also explains why native workers tend to receive higher wages than non-natives at similar levels of education, and why the wage distribution can become more equal with immigration.

There are further obvious economic gains from migration (whether inwards or outwards):
- ability of more productive businesses to expand across wider markets and production locations (understanding markets, disseminating patterns of consumption and re-establishing work & production processes in new locations all requires rotation of workers, access to talent from different backgrounds and ideally migration of consumers between locations too). Combined with this, free & more frequent migration intensifies competitive pressure and raises productivity across all markets towards the level of the world leading businesses in every segment.

- individual workers generally move for personal career progression - each incremental migration helps either to terminate a period of unemployment, to provide an improved perceived income, or to allow the worker to develop their skills or career in some other fashion. In that sense, each personal migration event is a step improvement in Paretto efficiency and raises aggregate income. More free migration makes labour markets (and 'residency markets' if you consider cities & states as such) more competitive.

- migration generates more integrated social networks of professionals, scientists, engineers, skilled people, etc, which supports faster dissemination of new ideas, contributing also to the faster development of the human knowledge horizon (i.e. faster growth)

- greater awareness of the policy instruments in other countries also stimulates more cross border comparisons, and should hopefully result in faster spread and adoption of best practice across many institutions and government activities

- where there is a particular supply shortage for skills in a given location, migration can close that shortage, raising the standard of living for the majority of consumers and workers in that location (imagine how dental hygiene would improve if thousands of Romanian & Bulgarian dentists could more easily come to the UK). This touches on the "reducing income inequality" effect of immigration discussed in the article.

"At the other end of the spectrum stood Estonia, with a rate of -16.7%" That´s a bit flawed statistics - it includes Soviet Army/family members of military/KGB personnel withdrawal from Estonia/Latvia in 1992-1994. It´s like saying France had a huge population loss in 1944, with German troops leaving.